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Property or Knowledge Problem?

I don’t know the debate literature on the Mises–Hayek re-homogenization and de-homogenization well enough to know where this comment fits in, but this is something I’ve been thinking about for a short while now. There is a defensible way of interpreting Mises’ work on economic calculation in a socialist society as a Hayekian knowledge problem. It came to me when I read Jörg Guido Hülsmann’s Mises: The Last Knight of Liberalism, specifically when he discusses the motives behind Mises’ work. I don’t know whether Mises ever foresaw the knowledge problem, but it seems to me to be a small step from his position on the problem of imputation.

I’m sure the idea had been floating around for some time, but in Principles Carl Menger posits that the values of means of production are derived from the values of the demanded consumer goods they ultimately produce. This is known as price imputation, or derived demand. The problem is that nobody really understood how this process occurred. There were a number of theories developed, including one by Friedrich von Weiser which revolved around his concept of “natural value.” Mises, in a sense, sidestepped the problem by accepting that these values simply aren’t known. This set the stage for the development of his theory of economic calculation: markets develop proxies, known as prices. Prices aren’t a perfect reflection of value, but monetary profit and loss accounting helps the process balance without capsizing.

The main issue of contention, as I understand it, is that Mises emphasized property and Hayek emphasized knowledge. These aren’t incompatible positions. If we look at it from an institutional perspective, Mises was explaining the institutions which provide the rules which determine the process of price determination, and these institutions include private property — without the owners and would-be owners of the means of production bidding their property back-and-forth on markets, prices would not form. But, this was to help fill the gap in the theory of imputation: this knowledge isn’t necessary if society develops proxies to take its place. Hayek, occupied with related work on equilibrium theory and expectations, simply focused on the knowledge aspect of the subject. He was also debating economists who thought they did have the theory to run the economy, and he had to remind them that their models without real world values were useless for planning.

Some people think the two theories to be incompatible. Others think them compatible, but ultimately two different critiques of socialism. I think it’s the same critique of socialism seen from two different angles.

Actually, not only do I find Hoppe’s article unconvincing, I also have difficulty finding a bit of truth in it. Further, it’s extremely unsophisticated. For example, in his discussion of the firm, Hoppe seems totally unconcerned with auxiliary literature that: (a) shows that firms exist primarily to overcome the costs of using the pricing process, and; (b) firms do suffer from a “knowledge problem” as they grow in size. More importantly, he doesn’t seem to understand Hayek’s argument. Hayek never advocates complete decentralization of the division of labor, nor does he assume that completely decentralized knowledge is a positive end — he assumes decentralized knowledge as a reality society has to deal with. What’s interesting is that Hoppe references some of Hayek’s later work, which in large part deals with the institutions that help coordinate human activity (which is what Mises talks about in his work on property rights, prices, and economic calculation). Finally, Hoppe goes off on a tangent on Hayek’s political philosophy, and even there Hoppe’s rant seems to completely miss the point.

“There is a defensible way of interpreting Mises’ work on economic calculation in a socialist society as a Hayekian knowledge problem”

Of course there is! Kirzner has been pointing this out for years, and I have made the same point. The socialist dictator could simply assign prices to various goods that allowed precise calculation: the problem is those prices would not reflect real knowledge of opportunity costs. Mises did explicitly recognize this: he LOVED the knowledge essays of Hayek. The whole “de-homogenization” effort of Salerno, Hoppe, et al. is solely based on “Hayek was a pinko, so he must have been wrong.”